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Q47 (IAS/2020) Economy › Money, Banking & Inflation › Monetary policy tools Official Key

If the RBI decides to adopt an expansionist monetary policy, which of the following would it not do ? 1. Cut and optimize the Statutory Liquidity Ratio 2. Increase the Marginal Standing Facility Rate 3. Cut the Bank Rate and Repo Rate Select the correct answer using the code given below :

Result
Your answer: —  ·  Correct: B
Explanation

The correct answer is Option 2. An expansionist monetary policy (Easy Money Policy) aims to increase liquidity in the economy to stimulate growth. This is achieved by making credit cheaper and more accessible.

  • Statement 1: RBI would cut the Statutory Liquidity Ratio (SLR) to leave more funds with banks for lending, thereby increasing money supply.
  • Statement 2: Increasing the Marginal Standing Facility (MSF) Rate makes borrowing from the RBI more expensive for banks. This is a contractionary measure used to reduce liquidity. Therefore, the RBI would not do this during an expansionist phase.
  • Statement 3: Cutting the Bank Rate and Repo Rate reduces the cost of borrowing for commercial banks, encouraging them to lower lending rates for consumers, which aligns with expansionist goals.

Since the question asks what the RBI would not do, only Statement 2 is correct.

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Don’t just practise – reverse-engineer the question. This panel shows where this PYQ came from (books / web), how the examiner broke it into hidden statements, and which nearby micro-concepts you were supposed to learn from it. Treat it like an autopsy of the question: what might have triggered it, which exact lines in the book matter, and what linked ideas you should carry forward to future questions.
Q. If the RBI decides to adopt an expansionist monetary policy, which of the following would it not do ? 1. Cut and optimize the Statutory L…
At a glance
Origin: From standard books Fairness: High fairness Books / CA: 10/10 · 0/10
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This is a foundational 'Sitter' question. It tests the core logic of Monetary Policy: Expansionary = Lower Rates/Ratios = More Money Supply. The only challenge is the 'NOT' in the question stem, which is a classic attention trap, not a knowledge gap.

How this question is built

This question can be broken into the following sub-statements. Tap a statement sentence to jump into its detailed analysis.

Statement 1
Would the Reserve Bank of India (RBI), when pursuing an expansionary monetary policy, cut and optimize the Statutory Liquidity Ratio (SLR)?
Origin: Direct from books Fairness: Straightforward Book-answerable
From standard books
Indian Economy, Nitin Singhania .(ed 2nd 2021-22) > Chapter 7: Money and Banking > CASH RESERVE RATIO (CRR) vs STATUTORY LIQUIDITY RATIO (SLR) > p. 169
Presence: 4/5
“Both the reserve requirement tools are used by the Reserve Bank of India (RBI) to regulate the supply of money in the economy. However: CRR is maintained as a percentage of the Demand and Time Liabilities (DTL), whereas SLR is maintained as a percentage of the Net Demand and Time Liabilities (NDTL).”
Why this source?
  • Identifies CRR and SLR as reserve-requirement tools the RBI uses to regulate the money supply.
  • Implies adjustments in these ratios alter available bank funds and thus monetary conditions.
Macroeconomics (NCERT class XII 2025 ed.) > Chapter 3: Money and Banking > Cash Reserve Ratio (CRR) = Percentage of deposits which a bank must keep as cash reserves with the bank. > p. 40
Presence: 5/5
“Apart from the CRR, banks are also required to keep some reserves in liquid form in the short term. This ratio is called Statutory Liquidity Ratio or SLR. In our fictional example, suppose CRR = 20 per cent, then with deposits of Rs 100, our bank will need to keep Rs 20 (20 per cent of 100) as cash reserves. Only the remaining amount of deposits, i.e., Rs 80 (100 – 20 = 80) can be used to give loans. The statutory requirement of the reserve ratio acts as a limit to the amount of credit that banks can create.”
Why this source?
  • Explains SLR limits the amount of deposits banks can use to give loans, directly constraining credit creation.
  • Lowering such a constraint would increase banks' capacity to lend, consistent with expansionary aims.
Indian Economy, Vivek Singh (7th ed. 2023-24) > Chapter 2: Money and Banking- Part I > The following are the major instruments/tools that RBI uses for conducting its monetary policy: > p. 63
Presence: 3/5
“is called CRR. "In terms of Section 42(1) of the RBI Act, 1934 the Reserve Bank, having regard to the needs of securing the monetary stability in the country, prescribes the CRR for SCBs without any floor or ceiling rate". Statutory Liquidity Ratio (SLR) The amount of reserves that the scheduled commercial banks are required to maintain with themselves on a daily basis in safe and liquid assets such as government securities, gold and cash with respect to their NDTL is called SLR. Excess CRR balances are also treated as liquid assets for the purpose of SLR i.e., SLR can be maintained as cash balance with RBI.”
Why this source?
  • Defines SLR as reserves held in liquid assets against NDTL, clarifying its mechanical role in bank reserves.
  • Shows that changing SLR changes the portion of deposits locked in liquid assets versus available for lending.
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